Wednesday, March 29, 2006

Part 6 - Hyperwage Theory: The Wealth of the Nation


Table of Contents

Part 2
Part 3
Part 4
Part 5
Part 6
Part 7
Part 8
Part 9
Part 10

Part 12
Part 13
Part 14
Part 15
Part 16
Part 17
Part 18
Part 19
Part 20

Part 22
Part 23
Part 24
Part 25
Part 26
Part 27
Part 28
Part 29
Part 30
Part 32
Part 33

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The Misadventures of the Street Strategist Vol 1 to 13


Hyperwage Theory Part 06

Hyperwage Theory Part 6

Chapter 6: The Wealth of
the Nation

One of the greatest ironies in my life is that I am an indigent who is an expert on the capital markets. Well, that’s not quite true. I sort of lie in-between the extremes. I am impecunious but not quite an indigent, and I am knowledgeable on the capital markets but not quite an expert. But at least I have given you a sense of magnitude and proportion as to my talent and wealth and you will have gauged for yourself whether to believe me or not.

Faith and belief
By the way, I still get many letters mostly from business executives maintaining that Hyperwage Theory is a mere intellectual curiosity. They usually cite economic and business principles as to why Hyperwage Theory will remain a Utopian concept.

As I have mentioned earlier, I only want to deal with PhDs in economics because I can’t give you a tutorial in economics. Just an example, I have found out that many business executives, even those running natural monopolies have the wrong concept of returns to scale (economies of scale). Is a small profit per unit sold being converted into a big profit by selling more volume an example of economies of scale?

I admire their logic but they all fall under the pitfalls I have already mentioned. Train 1 vs. Train 3, apples vs. oranges, Newtonian vs. Einsteinian. Their discussions are Newtonian, which of course, are very logical. But Newton is wrong when it comes to physics at the speed of light.

What I’m saying is that I have also thought about the same arguments for almost a decade until I realized that accepting current theory was more irrational than creating a new one. We are so good at justifying the hundreds of defects of modern theory but fail to defend one or two issues with Hyperwage. I consider this a wrong application of our intellectual talents.

Breathing examples
But hey, guys, when it’s you and me against the world, side with the world.

After all I’m only a one-man thinking machine. I couldn’t possibly be right.

Maybe you are not giving it a deeper thought. Or maybe, you are incapable of deeper thought. Your thought ends where Hyperwage begins. There, have I challenged you enough?

As I mentioned before, truth and logic alone are not sufficient to form faith and belief.

Maybe you need me to be a world-famous Nobel Prize winner before you believe in the Hyperwage Theory. But then, how can I be a Nobel Prize winner if you don’t believe in Hyperwage in the first place? That’s the catch. It’s Catch-22.

By the way, as a parting shot to those who do no think Hyperwage is possible, I have some empirical data to prove that it could exist. The economies of Singapore, Hong Kong, Japan, Canada, Germany, and the USA are examples of living, breathing, scintillating Hyperwage economies.

In fact, all rich nations have been adopting the Hyperwage Theory without them realizing that hyperwage is the most important element of their success. That’s the irony.

Really, I find it amusing. The Third World countries are skeptical of Hyperwage because they do not think they deserve it. On the other hand, the First World countries have invariably failed in redeeming the poor nations because the rich nations do not realize that hyperwage is the most important element of their success. Life is full of ironies.

Inadequacies of financial economics
Anyway, as such an expert on financial economics, I took it upon myself to single-handedly solve the problems of the Third World countries. I found it natural to start with the capital markets. After all, rich countries are rich because they have capital.

I studied capital flows, inflation, savings rates, tax rates, GDPs, financial instruments, and international finance. Ah, big words, big terms. But I did think about them. Why are rich countries rich and poor countries poor?

The more I thought about these variables, the more I realized that there were too many variables to control. Monetary policy on one hand, and fiscal policy on the other, combined, have too many variables. Is there a simpler way to reduce the poverty level of the poor nations?

For the benefit of those who don’t have PhDs in economics, monetary policy is a country’s control of monetary levels by controlling interest rates, bank reserve requirements and similar monetary variables. This has the effect of targeting inflation levels, tightening and loosening of credit, and other financial variables directly related to monetary levels. These controls can be changed overnight, if needed, therefore, it is a speedy weapon of financial economics. Monetary policy is usually controlled by a country’s central bank or finance ministry.

On the other hand, fiscal policy is the country’s control of the budget and expenditures through raising and lowering of taxes, increasing or decreasing government spending, and similar long term actions. While monetary policy rests with the central bankers, fiscal policy is primarily controlled by the legislators.

Keynesian economics primarily deals with fiscal policy while monetarism deals with monetary policy.

Non-economic variables, again
Again, the above are financial and economic variables. How about the non-economic variables? I consider them as problems that need to be resolved using economics.

Anyway, after a thorough analysis on my part, given my weak education and experience on economics, I discarded financial economics. Too complicated, too multi-variate, and too far removed from the actual issues of poverty.

So I began to ask innocent questions and tried to answer them with innocent answers. Why are doctors going to the US as nurses? Why are teachers working as domestic helpers in Singapore? Why does it take an Australian minimum wage worker only 15 minutes to buy a Big Mac while it takes almost two day’s wage for a minimum wage worker in Pakistan to do the same?

I have been tinkering with financial economics and I found the answer in labor economics. What a revelation.

Labor economics
There is a shortage of teachers in our country but there is an excess of teachers from our country who are working in the Middle East or Singapore or Taiwan. Not as teachers, but as toilet bowl cleaners, ironing ladies, cooks, caretakers for the aged, and tutors all rolled into one.

A domestic helper in Hong Kong earns about P24,000 per month which is probably the salary of a colonel in our Armed Forces. Unbelievable? The Hongkongers find this incredible.

This is why many foreigners have a low regard for Filipinos. Their idea of respect for our people is based on their valuation of our own people. If their domestic helpers are being paid the salary of an Air Force colonel in our country, do you really expect them to treat us seriously?

You may find this logic ludicrous, but guys, trust me, in the street level in the rich countries, their ordinary people think of us in this perspective.

It was then that I realized that the manner that a country treats the value of the poorest of the poor, the lowest of the low, the least of its brethren is the key to its economic wealth. The explanation lies in the Keynesian multipliers and accelerators but I’m not going to discuss it now.

Adam Smith’s Wealth of Nations was anchored on free enterprise and the concept of the invisible hand that guides free markets to equilibrium. The classical economics of Say’s Law governs the economic thought of Adam Smith and the other classical economists.

I promised in the outset of this series that I will tell you what makes classical economics classical and what makes Keynesian economics modern.

Classical economics
The basic philosophy of classical economics hinges on these two ideas.

First, the economy is self-adjusting, therefore, the government doesn’t have to interfere.

I agree with this idea and the government officials and legislators should abide by this, but then again, they are politicians. They know nothing of economics.

Second, except for unusual circumstances such as war or speculative crises, the norm is full employment.

Two theories
Classical economics has two basic theories. The first is Say’s Law. Under Say’s Law,
a) Supply creates enough factor income to clear the market and as a result inventories will not accumulate, and therefore, a slow down to use excess inventory, which causes unemployment, is not necessary and
b) Savings is not a leakage because interest rates adjust to insure savings is borrowed and invested. Leakage describes the loss of a variable required to maintain a state of equilibrium (stable level of economic activity). Interest rates drop when savings increase to insure savings is invested and there isn’t leakage.

The second basic theory of classical economics is the Price-Wage flexibility. During periods of slow economic activity wage rates would fall and everyone wanting to work could find work. All factor prices, not just wages, would adjust downward and all factors would be fully employed. “Real” factor prices would therefore remain constant. Of course, in our daily experience, this theory is far from the truth.

Modern day slavery
As you can see in Exhibit 1 (Horrible domestic helper’s wages), poor countries are characterized by low valuation of labor. Is this a result or the cause of poverty?

Because our teachers are paid less than what maids in Hong Kong are earning (P24,000), they emigrate there as lowly maids. In effect, Hong Kong or Saudi Arabia have very intelligent and talented domestic helpers.
And what is the flown-on effect of this to Hong Kong? The maids, being more educated than their masters, are the ones tutoring their children. Maid and tutor at the same time. While our country does not even have enough teachers. How does modern economic theory address this issue?

Exhibit 1. Horrible domestic helper’s wage
RP Maid’s Wage
Hong Kong’s Maid
P2,000 =US$37.00
Daily (26 days)
P77 = US$1.41
Hourly (10 hrs)
P7.7 = US$0.14
Be grateful
Take it or leave it
Effective: Apr 2007

Exhibit 1. Horrible domestic helper’s wage
RP Maid’s Wage
Hong Kong’s Maid
P2,000 =US$37.00
Daily (26 days)
P77 = US$1.41
Hourly (10 hrs)
P7.7 = US$0.14
Be grateful
Take it or leave it
Effective: Apr 2007

By the way, as an exemplification of how Hyperwage may be implemented, the US has already planned well in advance its own wage hike. By April 2007, the minimum wage will be US$7 per hour (that’s P383 per hour.) In this manner, all businesses will have time to prepare their own cost-structure management.

By 2007, since our government is pursuing the strategy of poverty, the maid’s wages will still be around P2,000 or P2,500.

Looking at Exhibit 1, we can see how horrible our own brand of religious compassion is.
For the same amount of work, the Philippines is paying P7.7 per hour, while Hong Kong is forced by its own government to pay P89.5 per hour, while in the USA P383.

Monthly, the domestic in the Philippines is paid P2,000 to P3,000 per month, in Hong Kong P23,800 while in the USA P99,500.

Now, are you still asking why the USA has the most intelligent dishwashers in the world (our engineers) and the most brilliant nurses (our doctors)? Do you think this will redound to increased productivity in the US? Will they have a positive upward economic spiral? Yes.

Let me ask you, is the Philippines, despite being the most religious nation on earth, guilty of practicing modern-day slavery and even proud of it by selling this specific feature to the rich nations?

Look at the government’s attitude. In Hong Kong, the government mandates that you have to pay P23,000 to the lowest class of labor, take it or leave it. If you can’t afford, don’t hire a maid. Buy a washing machine and you will add income to the washing machine appliances industry.

Can you imagine if all houses in the Philippines bought a washing machine? The industry will employ many workers.
In the US, the government decrees that you have to pay the least of the workers P99,500 per month. Take it or leave it. All our engineers migrate to the US as gas pump attendants.

In the Philippines, the domestic helpers are not even classified as workers. Whew. Not even as lowly workers. They are completely ignored. I inquired with the NSCB and DOLE and they don’t even know how many domestic helpers are being employed. (Funny, the official wrote me, “Are you asking about Filipinos working abroad as domestic helpers?”)

The government will say to the maid: Be grateful you have a job. Which do you want, P2,000 or no job at all?

But it’s the wrong dilemma. Wrong game, but our President who is an economist thinks that this is the only game.

Wealth of the nation
Adam Smith had his own theory of the wealth of nations. The Street Strategist has his own. Incidentally, it has a biblical ring to it. Whatsoever you do to the least of my brothers you do unto the economy. If you keep them poor, the economy will be poor. If you practice modern-day slavery, you will not only be a morally bankrupt nation but an economically bankrupt one as well.

In other words, under the Hyperwage Theory, the wealth of the nation depends on its lowliest worker, its weakest link, its poorest of the poor, its lowliest of the low.

As the most religious nation of earth, are we proud of this modern day slavery which we are vigorously perpetrating as a correct economic policy?
(Thads Bentulan, June 9, 2005)
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